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2016 (8) TMI 250
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....ty of Section 66B of the Finance Act, 1994 ("FA 1994") read with 65B(40) and Section 66D of the FA 1994 as amended by Clause (f) of Section 107 and Clause (2) of Section 109 of Finance Act, 2015 ("FA 2015") respectively, along with Notification No. 14/2015/-ST dated 19th May 2015, which levies service tax with effect from 1st June 2015, on persons who manufacture alcoholic liquor for human consumption on job work basis. Also challenged is the constitutional validity of Section 113(A) (1) of the Finance Act, 2009 ("FA, 2009") by which Section 65(19) of the FA 1994 stood amended. 2. The central thrust of the Petitioners' argument is that Parliament lacks the legislative competence to enact the said amendments since the activity of manufacture of alcoholic liquor for consumption, whether for oneself or for another person, lies exclusively within the domain of the State Legislature under Entry 51 of List II of Schedule VII to the Constitution. The case of the Respondents on the other hand is that service tax introduced by way of Chapter V to the FA 1994 is within the legislative competence of the Parliament to levy and collect. The topic of legislation is sought to be traced to ....
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....rom 1st April 2013. 5. KBL entered into an agreement with UBL on 7th February 2011 for the purposes of manufacture and sale of beer under the brand name of "Kingfisher". UBL agreed to provide process parameters to KBL. UBL also permitted KBL to use the trademarks owned by UBL. On its part KBL agreed to manufacture and dispose of UBL"s beer to the State Beverages Corporation/State regulated depots, wholesalers/indenters having necessary permits/licenses. 6. CIPL states that under the above agreement dated 7th February 2011, UBL's only responsibility was branding of the beer and to provide the process of manufacture of beer under its brand name. It was KBL"s responsibility for brewing, bottling, packaging, storing and selling of beer of the Kingfisher brand, including usage of all ingredients, raw materials, brewing specifications. All proceeds from the sale of beer were to be deposited in a bank account, jointly operated by KBL and UBL exclusively for beer produced under Kingfisher brand. The operational costs such as raw material etc. were to be met out of those accounts. KBL was entitled to a specified amount per case as retention towards energy and fixed costs. The bott....
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....nvoked. The Petitioner had wrongly availed the exemption granted by Notification No. 39/2009-ST dated 23rd September 2009 and deposited service tax of Rs. 22,64,427 along with interest of Rs. 7,09,346 on 26th March 2013. 8. The concept of a 'negative list' of activities that would not be amenable to service tax was introduced by the FA, 2012 with effect from 1st July 2012. Section 66D which enumerated the negative list was inserted and under clause (f) therein "any process amounting to manufacture or production of goods" was made part of the negative list of services. Further Section 65B (40) of FA 1994 defined "any process amounting to manufacture or production of goods" to include "any process amounting to manufacture of alcoholic liquors for human consumption". A further change was introduced with Section 107 Clause (f) of the FA 2015 omitting the words "alcoholic liquors for human consumption" occurring in Section 65B (40) of the FA 1994. Further Section 109 (2) of the FA 2015 substituted Clause (f) of Section 66D of the FA 1994 to provide for tax on "services by way of carrying out any process amounting to manufacture or production of goods excluding alcoholic liquo....
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....aran, learned counsel appearing for the Petitioners made the following submissions: (i) There is a complete and careful demarcation of taxes in the Constitution and there is no overlapping as far as the fields of taxation are concerned. The mutual exclusivity as reflected in Article 246(1) of the Constitution requires the taxing entries to be construed so as to maintain exclusivity. Although the taxing entries must be given a liberal interpretation, it must be such as not to bring within the purview of a Union taxing entry, a tax which falls within the domain of the state legislature. (ii) In the present case, the two competing entries are Entry 51 of List II of the Seventh Schedule which provides for State Legislature to make laws for levy of duties of excise on alcoholic liquors for human consumption and Entry 97 of List I which permits Parliament to make laws on "any other matter not enumerated in List II or List III including any tax not mentioned in either of those lists". It is submitted that in the garb of "aspect theory" the Parliament cannot levy tax on activity which falls within the exclusive legislative competence of the State Legislature. (ii....
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....ent and the incidence of levy. Here it was the manufacture of alcoholic liquor for human consumption. A reference is placed on the decisions in State of Kerala v. Maharashtra Distilleries Ltd. (2005) 11 SCC 1 and Municipal Council, Kota v. Delhi Cloth & General Mills Co. Ltd. (2001) 3 SCC 654. (vi) It is pointed out that the Entry 51 of List II is similar to the relevant part of Entry 84 of List I which deals with duties of excise on tobacco and other goods manufactured. Neither Entry 84 of List I nor Entry 51 List II makes distinction between manufacture of liquor on job work basis and manufacture on the manufacturer"s own account. The reference is made to the decisions in Empire Industries Ltd. V. Union of India (1985) 3 SCC 314 and Ujagar Prints v. Union of India (1989) 3 SCC 488. Thus if the State Legislatures were to levy tax on manufacture of liquor on job work basis, that would be covered under Entry 51 of List II. Consequently, levy of service tax on such job charges are unconstitutional and could not be sustained on the basis of Entry 97 of List I. The reference is made to Notification No. 119/1975-CE dated 30^th April 1975, which levied excise duty only on the ac....
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....arrangements for manufacture of alcoholic beverages. There may be a "brand licensing arrangement" under which the job worker to whom the task of manufacturing alcoholic beverages is given holds licence while the property, risk and reward of the products so manufactured, rest with the licensee/manufacturer. The brand owner apart from giving permission to such manufacturer is not directly involved in manufacture and retail of alcohol. In such instance, the taxable service was the service by way of grant of permission by the brand owner to the licensee to use the brand name for sale of alcohol. (iii) There can be an arrangement of lease whereby the Lessee could produce alcoholic beverages for the owner of the production facilities. The consideration was in the form of rent paid to the owner by the manufacturer. The taxable service would be the renting of the production facilities to the lessee by the lessor. (iv) There could also be an arrangement of "contract manufacturing' where the principal manufacturer or the brand owner outsources the services of manufacturing to a contractor (job worker), who possesses manufacturing facilities, under the terms of a license....
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....words the Parliament is not seeking to legislate on a topic exclusively within the domain of the State under Entry 51 of List II of the Seventh Schedule of the Constitution. (x) Reliance is placed on the decisions in State of Madhya Pradesh v. Rakesh Kohli (2012) 6 SCC 312, Association of Leasing and Financial Service Companies v. Union of India (2011) 2 SCC 352, Gujarat Ambuja Cements Ltd. v. Union of India (2005) 4 SCC 214, All India Federation of Tax Practitioners v. Union of India (supra) and Tamil Nadu Kalyana Mandapam Association v. Union of India (2004) 5 SCC 632. (xi) The decision of the Full Bench of the Madhya Pradesh High Court in Maa Sharda Wine Traders v. Union of India 2009 (15) STR 3 (MP) is distinguishable since it was dealing with Section 65 (19) and Section 65 (76b) of the FA 1994 as it stood prior to 1st September 2009. An amendment was carried out with effect from 1st September 2009 to enable levy of service tax on contract manufacture of alcohol. By Notification dated 5th June 2012, both Sections 65 (19) and 65 (76b) of the FA 1994 were declared to be not applicable since manufacture of alcoholic beverage was included in the negative list. How....
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....itution Bench of the Supreme Court in Union of India v. Shri Harbhajan Singh Dhillon 1971 (2) SCC 779 explained that before resort can be had to residuary Entry 97 of the Union List, to explain the legislative competence of Parliament to enact a taxing statute, it has to be first ascertained whether the tax legislation in question is covered by any specific entry in List II. If it does not fall under List II, then it can safely be traced to the residuary entry in the Union List. The specific observations in para 67 of the judgment in this regard, reads as under: "67. .....If there had been no list I, many items in List II would perhaps have been given much wider interpretation than can be given under the present scheme. Be that as it may, we have the three lists and a residuary power and therefore, it seems to us that in this context if a Central Act is challenged as being beyond the legislative competence of Parliament, it is enough to enquire if it is a law with respect to matters or taxes as enumerated in List II. If it is not, no further question arises." 17. In Navinchandra Mafatlal v. Commissioner of Income Tax (supra), the Supreme Court explained that "in constru....
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.... a separate consideration is charged. Explanation 3. - For the purposes of this Chapter, - (a) an unincorporated association or a body of persons, as the case may be, and a member thereof shall be treated as distinct persons; (b) an establishment of a person in the taxable territory and any of his other establishment in a non-taxable territory shall be treated as establishments of distinct persons. Explanation 4. - A person carrying on a business through a branch or agency or representational office in any territory shall be treated as having an establishment in that territory;" 20. Section 66B of the FA 1994 is charging section and reads as under: "66B. Charge of service tax on and after Finance Act, 2012 There shall be levied a tax (hereinafter referred to as the service tax) at the rate of twelve per cent on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed." 21. Section 66D of the FA 1994 is titled "Negative list of services". It states that the negativ....
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.... competing entries in the present case are Entry 51 of List II which according to the Petitioners covers the entire field as far as manufacture of alcoholic liquor or human consumption is concerned, whether it is manufactured by oneself or through another by way of job work. The competing entry, relied upon by the Respondents to sustain the legislation, is Entry 97 of List I which is the residual entry. The question that then arises is whether 'in pith and substance' the provisions under challenge seek to levy service tax on manufacture per se of alcoholic liquor for human consumption, or on the service aspect of the manufacture which is undertaken by one entity for another on job work basis? 27.1 In M/s. Hoechst Pharmaceuticals Limited v. State of Bihar (supra) the pith and substance doctrine was discussed. The Petitioner in that case was engaged in the manufacture and sale of various drugs throughout India including the State of Bihar. The question that arose was whether Section 5 of the Bihar Finance Act, 1981 ("BF Act") which provided for the levy of a surcharge on every dealer whose gross turnover during a year exceeds Rs. 5 lakhs was constitutionally valid. It was ....
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....given to it and equally giving to the language of the State Legislative List a meaning which it can properly bear. The non obstante clause in Article 246(1) must operate only if such reconciliation should prove impossible. Thirdly, no question of conflict between the two Lists will arise if the impugned legislation by the application of the doctrine of 'pith and substance' appears to fall exclusively under one list, and the encroachment upon another list is only incidental." 27.3 The Supreme Court in M/s. Hoechst Pharmaceuticals Limited v. State of Bihar (supra) then proceeded to observe as under: "76. It would therefore appear that there is a distinction made between general subjects of legislation and taxation. The general subjects of legislation are dealt with in one group of entries and power of taxation in a separate group. In M.P.V. Sundararamier & Co. v. State of A.P. 1958 SCR 1422, this Court dealt with the scheme of the separation of taxation powers between the Union and the State by mutually exclusive lists. In List I, Entries 1 to 81 deal with general subjects of legislation; Entries 82 to 92-A deal with taxes. In List II, Entries 1 to 44 deal with ge....
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....a (supra), the Supreme Court explained the 'pith and substance' doctrine in the following words: "As stated above, every entry in the Lists has to be given a schematic interpretation. As stated above, constitutional law is about concepts and principles. Some of these principles have evolved, out of judicial, decisions. The said test is also applicable to taxation laws. That is the reason why the entries in the Lists have been divided into two groups, one dealing with general subjects and other dealing with taxation. The entries dealing with taxation are distinct entries vis-a-vis the general entries. It is for this reason that the doctrine of pith and substance has an important role to play while deciding the scope of each of the entries in the three Lists in the Seventh Schedule to the Constitution. This doctrine of pith and substance flows from the words in Article 246(1), quoted above, namely, 'with respect to any of the matters enumerated in List I.' The bottom line of the said doctrine is to look at the legislation as a whole and if it has a substantial connection with the entry, the matter may be taken to be legislation on the topic. That is why due w....
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....ther legislative power...." 31. Indeed, the law "with respect to" a subject might incidentally "affect" another subject in some way; but that is not the same thing as the law being on the latter subject. There might be overlapping, but the overlapping must be in law. The same transaction may involve two or more taxable events in its different aspects. But the fact that there is an overlapping does not detract from the distinctiveness of the aspects. ..." 34. Therefore while facially it might seem that one and the same activity is made the subject of two imposts, in pith and substance what is made amenable to one of the imposts, in this case service tax, is the 'service' aspect of job work and not the activity of manufacture by an entity for and by itself per se. 35.1 In All India Federation of Tax Practitioners v. Union of India (supra), the Supreme Court was examining if there was an overlap between profession tax covered under Entry 60 of List II and service tax. To begin with, the Court explained that: "..service tax is a value added tax which in turn is destination based consumption tax in the sense that it is on commercial activities and is not ....
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.... 37. Although several types of arrangements by which the job work undertaken by one entity for another were referred to, the case involving KBL and UBL appears to be one of contract manufacturing. In any event, this need not by itself detain the Court as that should be the task of the adjudicating authority called upon to adjudicate the SCN issued. Suffice it to note that as rightly pointed out by Mr. Jain that, if the brand owner itself is also manufacturing the product, the question of collection of service tax cannot arise. It is submitted that only where the manufacturing is undertaken, not by the brand owner, but its outsourced license holder, the question of rendering service for another person as defined under Section 65B (44) of the FA 1994 would arise. 38. The essential feature as far as Section 65B (44) of the FA 1994 is concerned is the rendering of a service i.e. any activity carried out by a person for another person for consideration. Therefore, a manufacturing activity undertaken by an entity for itself cannot be said to be a service provided to anyone and definitely not to itself. Therefore, that activity of manufacture by the brand owner who is also a licence....
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.... covered and therefore, the Parliament has no legislative power to levy tax on the transport of those goods. The Court explained there is a distinction between the object of tax, the incidence of tax and the machinery of the collection of the tax. The legislative competence is to be determined "with reference to the object of the levy and not with reference to its incidence or machinery." It is explained that the subject matter of the tax, as far as the provision of the FA 1994 is concerned, was not "goods and passengers, but the service of transportation itself. It is a levy distinct from the levy envisaged under Entry 56. It may be that both the levies are to be measured on the same basis, but that does not make the levy the same." 41.2 The Supreme Court in Gujarat Ambuja Cements Limited v. Union of India (supra) concluded as under: "32. Since service tax is not a levy on passengers and goods but on the event of service in connection with the carriage of goods, it is not therefore possible to hold that the Act in pith and substance is within the States tax is what is, in substance, taxes. In the circumstances, the Act could not be termed to be a colourable piece of le....
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....er to a subscriber, at the same time there was also the provision of the service itself. It was pointed out that the decision in BSNL v. Union of India (supra) recognises the aspect doctrine. The Court did not permit the State to levy taxes on the service aspect and upheld the levy of service tax on the provisions of telephone service. It was concluded in that case that there was no element of sale of goods involved. 44. In Sat Pal and Co. v. Lt. Governor of Delhi (supra) it was held that even if the legislation fell in one entry partly, either in List I or List III, and was partly governed by the residuary entry i.e. Entry 97 of List I, it would nevertheless be immune from attack. 45. The decision of Madhya Pradesh Full Bench in Maa Sharda Wine Traders v. Union of India (supra) was dealing with Section 65(19) and Section 65(76b) of the FA 1994 as it existed prior to September 2009. There was no question of considering whether service tax on contract manufacturing which has now been clearly defined by way of amendment to Section 66D(f) could be subject to service tax. With the negative list coming into effect from 1st July 2012, the two entries that were considered in Maa Sha....
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....gned tax is different and distinct from tax on sale of goods under Entry 54, List II of the Seventh Schedule to the Constitution." 47.2 It was observed that "the taxable event is the service which is rendered by the finance company to its customer(s). The value of taxable service under Section 67 is income by way of interest/finance charges (measures of tax) which is not determinative of the character of the levy. Thus Section 67 of the Finance Act, 1994 seeks to tax financial services rendered by the appellant(s) with reference to the income which the appellant(s) earns by way of interest/finance charges." The challenge was, therefore, negatived. 48. Learned counsel for the Petitioners sought to draw a distinction between the type of activity in each of the above cases, which according to him involved more than one distinct aspect and the present case which did not. It was submitted that in T.N. Kalyana Mandapam Association v. Union of India (supra) service tax was sought to be levied on 'letting out of mandap' and incidental services traceable to Entry 97 of List I whereas the competing entries that were distinct were tax on sale of food (Entry 54 List II), and tax ....